Bigger savers – do you really need to spread your savings?

For years my safe savings mantra has been "you’re protected up to £85,000 per person per UK-regulated financial institution" – therefore if you’ve got more, spread it into pots of no more than around £83,000 (to allow room for interest) to keep the whole amount protected (see safe savings for full info). 

While this sounds like a niche issue for rich folk, I’m surprised how often I’m asked it, whether at my TV show’s roadshows or phone-ins on This Morning or Radio 5 Live. So my suspicion is many more people than you might think have bigger savings. And those with larger amounts need to understand two major rule changes.

  • The £85,000 is dropping to £75,000; On 1 January 2016 the limit that the Financial Services Compensation Scheme promises to protect is dropping to £75,000 (this includes both capital and interest that has accrued).

    This rather perverse reversal is because our protection is linked to the rest of the EU’s €100,000 guarantee. Every five years the exchange rate is examined, and this has happened again. As the pound has strengthened our protection has dropped.

    However, I and many others do not believe it was strictly necessary and the UK could’ve kept protection at the old rate; yet it was decided not to.

  • There is a new ‘temporary high balance’ protection of £1,000,000. This has been in place since 3 July 2015. It states that if you have money in an account specifically from a life event eg, inheritance, house sale, insurance pay out or redundancy, it is now covered up to £1m for six months. A valuable extra protection especially for people dealing with big finances when they’re not used to it.

How do these changes impact a safe savings strategy?

If you want to save in perfect safety (or at least perfect safety as long as the UK Government doesn’t go bust – if that happens we’ve all bigger things to worry about) – there are only a few options for larger amounts.

These include government bonds, tax prepayment certificates or putting money in the government-owned NS&I’s product. Yet all of these rates aren’t usually that favourable compared to the top savings accounts. And even when rates can be decent with NS&I, there are often limits on how much you can save.

So what most bigger savers have done since 31 December 2010 when the protection level first hit £85,000 is spread their savings into multiple savings institutions – to keep maximum protection.

Yet the new life events protection does change that and is a decent boon if you qualify. Imagine you sell a £600,000 home and intend to rebuy within half a year. What most have done is put it in a mix of top savings, currently with the Post Office and Birmingham Midshires, and top savings from big name institutions, such as TSB, Halifax and Santander.

How the life events rule can boost your interest on a £600,000 home
Under Life Events Rule Spreading savings – £75,000 in each
Post Office Online Saver paying 1.61% Post Office Online Saver paying 1.61%
Birmingham Midshires Online Extra paying 1.6% Birmingham Midshires Online Extra paying 1.6%
The West Bromwich Building Society Websaver paying 1.55% The West Bromwich Building Society Websaver paying 1.55%
Virgin Money E-Saver paying 1.51% TSB eSavings paying 1%
  Halifax Online Saver paying 1%
  Nationwide Limited Access Saver paying 0.9%
  Lloyds eSavings paying 0.75%
  Santander eSaver paying 0.6%

For the sake of a simple explanation, rather than incorporating top bank account savings and top cash ISAs which have much higher interest on relatively small amounts – I’ve kept to main savings.

Under the temporary high balance rule in six months a basic rate taxpayer would earn just over £3,600 in interest, compared to around £2,700 under the spreading your savings technique. It’s a pretty decent amount and coupled with the much easier administration, it’s a win-win.

If I’ve got money in £85,000 pots, should I split them into £75,000 pots under the new regime?

If you’re lucky enough to have large permanent savings, or have kept the money from a life event longer than six months, spreading savings is still the best option. Yet of course to keep it in perfect safety those with it spread in £85,000 pots now need to spread it even further.

If you have £85,000 in an institution that’s right for you – your maximum exposure is £10,000 (and even in a fixed account you’re allowed a window to withdraw that to get it down to £75,000). For you to lose that money a number of things have to happen.

  • The institution needs to go bust, and that is unlikely as we’ve seen the government nationalise major banks rather than see that happening (the ‘too big to fail’ argument).

  • If it has gone bust, the government needs to decide not to simply transfer that bank’s savings book lock, stock and barrel elsewhere as it did with Bradford & Bingley, and Kaupthing Edge and others (during the 2008 crash this was its preferred strategy).

  • If it has gone bust, and the government isn’t transferring the savings book, even then we have seen in the past the government pay the entire amount out, even beyond the guarantee, as it did for all savers with Icesave (the only private individuals who lost money there were those who saved offshore).

Now I’m not saying we haven’t ever seen situations where people lost money as they had more than the guaranteed amount in, but it’s incredibly rare, especially for major savings institutions.

Whether that’s worth doing depends on your attitude to risk and rate. It is a question of balancing how much you spread and the interest you earn. No one can answer that risk balance for you but it is worth questioning yourself.

For the sake of theory let’s imagine someone sold a property worth £3 million and has the money in the bank for a couple of years. They could try and find 40 different UK financial institutions to spread it into, at which point your interest would be paltry (and in that case definitely check NS&I as it’d certainly come into play for a chunk of it).

Alternatively, they could take the attitude that by spreading it into say six accounts, each with £500,000 in, while you’re not perfectly protected, the mere fact of spreading it is mitigating the risk of one bank collapsing, and keeping the interest high. Plus, if you’re a couple and jointly own the home you’re both protected for £1m each.

There’s no right or wrong in this, but it is worth considering your approach to risk.

PS: Just to clarify the situation with NS&I as people often ask… if NS&I went bust it still has the Financial Services Compensation Scheme (FSCS) £85,000 (£75,000) limit. Yet both FSCS and NS&I are government-backed. So the only way NS&I would go bust is if the government let it, which would mean it was in breach of its own liabilities – so you couldn’t rely on the FSCS either.

In a nutshell what I’m saying is putting money in NS&I is as safe as it gets – and in certain accounts you can put more in than the £85,000 limit and still get protection in perfect safety.